Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Dalian Zhiyun Automation Co., Ltd. (SZSE:300097) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Dalian Zhiyun Automation
How Much Debt Does Dalian Zhiyun Automation Carry?
The image below, which you can click on for greater detail, shows that Dalian Zhiyun Automation had debt of CN¥83.4m at the end of September 2023, a reduction from CN¥201.9m over a year. However, because it has a cash reserve of CN¥64.4m, its net debt is less, at about CN¥18.9m.
How Strong Is Dalian Zhiyun Automation's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Dalian Zhiyun Automation had liabilities of CN¥469.9m due within 12 months and liabilities of CN¥4.19m due beyond that. Offsetting this, it had CN¥64.4m in cash and CN¥393.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥16.6m.
This state of affairs indicates that Dalian Zhiyun Automation's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥3.84b company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Dalian Zhiyun Automation has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But it is Dalian Zhiyun Automation's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Dalian Zhiyun Automation had a loss before interest and tax, and actually shrunk its revenue by 16%, to CN¥494m. That's not what we would hope to see.
Caveat Emptor
Not only did Dalian Zhiyun Automation's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥86m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥23m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Dalian Zhiyun Automation , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.